Guillaume Meyer: Can we introduce you as “Ms Eltif”?
: That’s a title others have used for me. In the context of Eltifs, what I would say is that I was probably the first madwoman to believe in Eltifs when the first proposal came out. I remember the day it was released. I almost jumped up and down in my office, thinking: “This is the product of the future!” So I have been involved since that day as chair of the Eltif working group of the Association of the Luxembourg Investment Fund Industry (Alfi).
You must have had to fight hard to convince people?
Yes, I’ve come a long way. At first, I recall everyone smiling at me. I went through the whole European legislative process. I tried to educate and talk to all the legislators, bodies and stakeholders. I put a lot of effort into working with the Luxembourg Financial Sector Supervisory Commission (CSSF). We aimed to find common ground and see how it could work in real life.
The first proposal came out in 2013 and was adopted at the end of 2015. Eltif 1.0 had provisions that were too strict to be adopted by the market. We spent a lot of time with stakeholders, asking: “How can we find the right balance vis-à-vis safeguards?” I was very lucky to be the lawyer who accompanied the first European retail Eltifs, presenting them to the CSSF and launching them. So, it’s certainly one of my passions.
Who can be credited with the creation of the Eltif?
The European Commission as part of the capital markets union (CMU) project. The idea started even before the CMU. After the financial crisis, many were asking how to mobilise private money to support the real economy. The Larosière report looked at individuals’ savings sitting idle and how to safely direct it towards financing growth. To some extent, the Eltif is a late child of the financial crisis.
Today, reports from the financial centre show that only 10 to 15% of the total money invested in Eltifs in Luxembourg comes from individuals. Why?
One needs to bear in mind that the average individual investor will not be able to invest the same amount of money as a large institutional investor. This could explain why these figures are circulating in the market. I can’t confirm the 10 to 15% estimate. Still, it makes sense. It takes time to gather a lot of money from individual investors, especially when they invest small amounts each time.
The Eltif has become a kind of quality label.
Nevertheless, most Eltifs in Luxembourg are meant for individual investors. The European Securities and Markets Authority’s (Esma’s) official register shows that only a few Luxembourg Eltifs are reserved for professional investors. The rest are designed for individual investors or for both types. I have structured many Eltifs. Only one or two were reserved for professional investors. The rest were open to individual investors or both categories.
Why are institutional investors and wealthy clients showing interest?
There are several reasons. First of all, the Eltif has become a kind of quality label. It’s a very clearly regulated product, with clear safeguards, clear limitations. Investors know what they are buying and what they are not buying. So, yes, it’s a bit of a quality label, I would say--that’s not an official term, of course. It’s a very well-established and recognised framework. So, if you talk about an Eltif, no one will start wondering: “Oh, what are its features?” You know you have something very reliable and well-protected.
Additionally, many institutional investors serve as intermediaries for the final end-investors. So, for pension funds, some of them in Europe will give fairly direct exposure to the end-investors who are individuals. This also goes for “unit-linked” products and nominee structures, where individual investors are indirectly exposed. Some institutional investors really want to invest in retail products. This helps them offer better options to the final end-investor.
What are the key indicators of success for Eltifs?
The number of Eltifs launched and the volume of assets under management. Another key measure is how widely Luxembourg Eltifs are distributed. Most Eltifs sold in different EU countries are based in Luxembourg. Others are set up in other EU countries and focus more on their home markets.
When will it be realistic to take stock?
To be able to talk about success, Eltifs need to maintain a high level in the long term. If you see many Eltifs launched and then liquidated or fizzling out a year later, that’s probably not a success. But if they continue to grow, if they continue to exist, if they continue to attract investors--and we have seen some cases of Luxembourg Eltifs that are at the top of the market in various countries, you see a lot of positive press, you see a lot of investors flocking in, even if it’s small amounts--I think that’s a success. And I would also mention long-term savings and retirement provision, where more and more people invest, even if it’s small amounts. For the average person, five or 10 or 15 years is long-term. Investing over five years can already be a long-term investment, as opposed to Ucits funds, where you can exit every day.
Some say Eltifs aren’t suitable for retail investors due to the lock-up. Is that true?
I don’t think so. There is a whole range of measures available to Eltif managers. There can be a lock-up period, which is the minimum holding time. However, there are also redemption windows and thresholds. For instance, once a year, you can redeem a certain percentage of your initial investment at a specific time. There is a wide variety of measures to adapt the Eltif product to individual investors. Managers pay close attention to what their target investors need. This includes both wealthy individuals and average people investing €20 a month. They then create products that meet these needs. Both managers and distributors are careful. They focus on protecting individual investors and meeting their needs.
Eltif 2.0, effective January 2024, aims to improve liquidity. Are its measures enough?
I think so. The calibration is being done with a lot of attention to investors’ needs, and the CSSF is also looking very closely at this balance. They will challenge new Eltif authorisation requests if the planned liquidity mechanism does not seem viable to them. From what I’ve heard, exceptional personal liquidity needs will always arise, but the overall approach is well-thought out and investor-oriented.
Another concern is the misselling of private market products. What safeguards does Eltif 2.0 offer?
The Eltif 2.0 selling rules are aligned with the Markets in Financial Instruments Directive (Mifid). Distributors usually need to do a suitability assessment. They will check if an Eltif is right for the investor they are selling to. The framework also limits complex cascade structures and enforces diversification and eligibility rules. In the last 12 to 18 months, I’ve noticed big improvements in distributor education. There have been many talks between Eltif managers, sponsors and distributors. These discussions help ensure that everyone understands the product and knows what types of investors it fits. The regulator also checks the selling arrangements.
Retail-focused Eltifs come with operational challenges, particularly around valuation and investor servicing. Is Luxembourg’s infrastructure equipped to support a retail-scale Eltif market?
In my view, yes. Luxembourg’s infrastructure includes service providers, the regulator, consultants, auditors and the overall setup. It is well-suited for both retail and alternative funds. Arguably, Luxembourg has been the leading exporter of retail funds under the Ucits framework over the past three decades.
Talk to different service providers. They know about specific needs. For example, they understand tax reporting for German investors and the needs of Danish and Austrian investors. They know these markets and are equipped to meet their demands. In fact, I would go so far as to say that Luxembourg is the strongest jurisdiction in this area, thanks to its decades-long experience.
The point that could still be improved beyond what we already have is probably distribution.
As for the operational challenges, Luxembourg is absolutely up to speed. In terms of valuation, retail-focussed Eltifs aren’t much different from existing alternative funds. Luxembourg has seen significant growth in this segment recently. So yes, Luxembourg is well-positioned on both fronts.
Are Luxembourg’s tax rules attractive?
Yes. All Eltifs, regardless of the regulatory regime or legal form, have been exempted from subscription tax in Luxembourg. Zero subscription tax, which is fantastic news. Luxembourg is looking at personal taxes to boost long-term savings and pensions. There’s no specific amendment for Eltifs yet. However, it would be interesting if it had a more appealing general framework.
The European Fund and Asset Management Association (Efama) has called for more tax incentives. Is that a good idea?
I certainly think so. We have had a number of discussions in this direction. I am part of Alfi’s working group on long-term savings and pensions. It’s important to help people invest their money in specific savings products. That’s why I am also very optimistic about the inclusion of Eltifs. Plans are underway to make it easier for investments in retail Eltifs through Luxembourg life insurance products, like “unit-linked” products. This is already ongoing and under discussion. So the first steps in the direction you mention are already underway, and it will certainly not stop tomorrow. So I really believe this will happen and that it has already started on the insurance side.
Beyond tax, what could Luxembourg improve?
We already have a very good framework. We have a very competent regulator. The CSSF has invested a lot in Eltifs. They have trained their staff and formed special teams. These teams are skilled and know the details of Eltifs. They focus on processes to make Eltifs run better and speed up approvals.
The point that could still be improved beyond what we already have is probably distribution. Digital access would be a big step forward--letting investors subscribe via smartphone, for example. This was part of the Pan-European Personal Pension Product (Pepp) discussion and appears in the EU retail investment strategy. Education is also key, even starting in schools, so people know Eltifs are an option for them.
And at the European level?
Some countries are introducing certain constraints or obstacles to the cross-border distribution of Eltif products. It’s very important to me that this product lets all European citizens and investors, both professionals and individuals, benefit from the single market. They should have access to all Eltifs from European countries. The Eltif is the first product based on European law that applies directly in all member states. We should maintain this spirit and ensure that all our investors across Europe have access to it.
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A long-term objective
An Eltif is an EU alternative investment fund that aims to facilitate the raising and channelling of capital towards long-term investments in the real economy. Compared to other EU alternative funds, the Eltif benefits from two main advantages, according to PWC: (1) the possibility to be marketed to retail investors across the European Union via a marketing passport and (2) the possibility to do loan origination across the EU.
“A relative success”
Created in 2015, Eltifs “have been a relative success so far, with only 159 Eltifs set up to date across the European Union, representing €13.6bn of assets under management,” writes PWC in the preamble to its report “An (Almost) Comprehensive Guide to the New Eltif Regulation.” “While Eltifs can be set up in any country of the European Union, they are nonetheless located in only four countries, with the grand duchy of Luxembourg having the lion’s share with 63% of the Eltifs or 100 Eltifs.”
“A welcome change”
A highly anticipated reform of the Eltif came into force in January 2024. “While the new regulation is not fulfilling all of its promises,” writes PWC, “and some points require improvement or more clarity, it has nonetheless been considered a welcome change since its adoption, improving the attractiveness of the Eltif regime, with 62 Eltifs set up in 2024.” Among the obstacles present in the 2015 iteration of Eltifs were operational challenges in banks for distribution to individuals. By providing clarifications and removing some of the previous obstacles, “the AIMA expects this updated framework to result in an additional €100bn in alternative assets funding over the coming five years.”
An active role within Luxembourg organisations
Silke Bernard, 49, is the global head of the investment funds practice at Linklaters in Luxembourg. She has particular expertise in alternative funds such as private equity, real estate and private debt, as well as in asset management agreements. Born in Berlin, Germany, she chairs several working groups of the Association of the Luxembourg Investment Fund Industry (Alfi) and the Luxembourg Private Equity & Venture Capital Association (LPEA). She leads the Luxembourg industry’s efforts on Eltifs and the Pan-European Personal Pension Product (Pepp).
This article was written for the of Paperjam magazine, published on 26 March. The content is produced exclusively for the magazine. It is published on the site to contribute to the full Paperjam archive. .
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